What exactly is SWIFT?

Have you ever transferred money abroad? If yes, You must have heard about the SWIFT code. SWIFT is not a payment service. It's simply a very secure messaging service used by banks.

SWIFT’s full form is Society for Worldwide Interbank Financial Telecommunications. When we transfer money from one country to another, your bank asks for the recipient's bank details and the SWIFT code of that bank.

How do bank uses this code to transfer money to another bank account? let's see with the help of an example.

For example, Person A who have a bank account in Bank A and wants to send $100 to Person B in Bank B. When Person A is transferring the amount they will provide the SWIFT code of Bank B. SWIFT will then send a secure message communication to Bank B including all the necessary information.

When Bank B receives this message payment transfer will get started. Let's see how the transfer will work.

SWIFT works when banks have a direct connection to each other meaning Bank A will have their account in Bank B and Bank B will have their account in Bank A.

Bank A will deduct the $100 from the Person A account.

Bank A will credit the $100 to Bank B’s account in their bank.

Bank B will deduct the $100 from Bank A’s account in their bank.

Bank B will credit the $100 (minus their fee) to Person B’s account in their bank.

So for SWIFT to work there should be direct connections between banks? not necessarily. When Bank A starts the transaction message, SWIFT will determine the route for the successful money transfer message.

Suppose if Bank A does not have a direct connection with Bank B (meaning Bank A does not have an account for Bank B and the same goes for Bank B), then SWIFT will determine the path for this transaction.

let's say there is an intermediary bank Bank C which can be used to facilitate this transfer. means that Bank A has accounted for Bank C in their bank. Bank C has accounted for Bank B in their bank and Bank B has accounted for Bank C in their bank.

Bank A will deduct $100 from Person A’s account

Bank A will credit $100 to Bank C’s account in their bank

Bank C will deduct $100 from Bank A’s account in their bank

Bank C will credit $100 (minus their fee) to Bank B’s account in their bank

Bank B will deduct the amount from Bank C’s account in their bank

Bank B will credit the remaining amount (minus their fee) to Person B’s account.

So if you see, if there are many intermediate banks in a transaction then this will increase the transaction fee as each bank will take their fee and the transaction will take time to complete.

This is high-level information about SWIFT, there are lots of other things that go in the process. but you get the idea about what is SWIFT now right?

Cheers!!